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UK still faces stretch of lowflation even after pound drop

The Bank of England may have to see a further depreciation of the pound before there's a noticeable impact on inflation that will allow policy makers to raise interest rates.

PHOTO: REUTERS

[LONDON] The Bank of England may have to see a further depreciation of the pound before there's a noticeable impact on inflation that will allow policy makers to raise interest rates.

In a monthly survey by Bloomberg, 33 of 36 economists said the currency's 6 percent drop against the dollar in the past two months has strengthened the outlook for consumer prices "a little."

One said it's helped a lot, while the remaining two said there was no impact. Data on Tuesday will show inflation was just 0.2 per cent in December, far below the central bank's 2 percent goal.

Sterling has been hit as growth momentum cools, while a planned referendum on Britain's European Union membership is further reducing its allure. Ian McCafferty, the only BOE policy maker voting to raise interest rates right now, has argued that the drop in the pound may compound upside risks to domestic costs.

Market voices on:

"The BOE has already admitted that the recent fall in the pound will provide some support to the inflation path, but we look for at least part of the recent decline to be retraced," said Peter Dixon, an economist at Commerzbank AG in London. That "suggests that the impact of sterling on inflation may well be modest."

WEAKER CURRENCY

In its policy statement last week, the BOE noted the pound's recent decline and said that it could, if it persists, help to offset a drag from lower import prices. Some banks forecast that the currency will continue to weaken.

JPMorgan Chase & Co and ING Bank NV predict it will slide to US$1.32 by the end of June, while Deutsche Bank AG last year forecast a plunge in 2016 to US$1.27. Those are some of the more extreme calls, with the median year-end forecast among analysts surveyed by Bloomberg at US$1.50. That's the lowest projection since June.

A decline would help to offset some of the downward pressure on prices. Governor Mark Carney and fellow BOE policy makers highlighted the currency's prior strength in late 2015, saying it could have a persistent drag on imported inflation.

The central bank forecasts that consumer-price growth will remain below 1 per cent until the second half of 2016. It kept its key interest rate at a record low this month, where it's been for almost seven years.

BOE DOVE

In a speech on Monday, policy maker Gertjan Vlieghe indicated he's in no hurry to begin tightening.

"Inflation pressures remain muted across a wide range of indicators," he said. "In order to be confident enough of the medium-term inflation outlook to raise bank rate, I would like to see evidence that growth is not slowing further, and that a broad range of indicators related to inflation are generally on an upward trajectory."

Mr Vlieghe was among the majority of the BOE's nine-member Monetary Policy Committee who voted to keep interest rates on hold this month.

According to the Bloomberg survey, Mr McCafferty - - the dissenter - isn't predicted to change his stance any time soon. In the poll, 31 out of 34 economists said he won't drop his call.